Lending Money to your Children

by Rainey Collins

Lending Money to your Children

A young couple were searching for their first home. They were both in full-time employment so they could afford the fortnightly mortgage repayments, but gathering funds together for a 20% deposit was a struggle.

Enter left stage Mum and Dad, who offered to loan the couple $50,000 towards their deposit, and it was agreed that repayments of $100 a month would be made to the parents.

A property came up that ticked all the boxes and the couple had to act quickly. Their offer on the property was accepted and funds exchanged along with the key to the front door. All turned out remarkably well…

However, before long the monthly payments to the parents waned in favour of a holiday to Asia. The parents were left out of pocket, and words were left unspoken across the dinner table at family gatherings. Could this situation have been avoided?

The key is to decide whether you are helping your child by way of a loan or a gift. Then the transaction can be documented by one of the following methods:

Loan Agreement

This will set out the terms of the loan ie: the rights and obligations of both the lenders and borrowers. It will state a schedule of payments and any interest due.

It may also include a clause relating to the lender’s right to register a second mortgage over the borrower’s property, or register a caveat on the title if the lenders are concerned the property will be sold before being repaid the loan. A caveat will prevent any further dealing with the property until the subject of the caveat (ie: your loan) is addressed. The caveat option is more commonly used than registering a second mortgage on the title of the property, as they are a simpler process and hence a more cost effective means of protecting your interest.

A clearly-defined Loan Agreement will enable both parties to know exactly what is expected of them.

Deed of Gift

This may be an option if a parent wants to give their child in effect an advance on their inheritance. If this is the case it should also be documented in your Will.

Bear in mind that a gift is normally relationship property so in the event of your child separating from their spouse or partner, half the value of the gift may well disappear “outside” the family, as their relationship property is divided.

Therefore if you are giving a gift to your child, it is highly recommended that your child enters into a Relationship Property Agreement with their spouse or partner to ensure your gift to your child is not later reduced by half.

With the above-mentioned young couple, the parents loaned money to them in haste, due to a tight turnaround in the property deal, and as a result, the transaction between the family members was not formally documented.

For more information on this topic, please contact the Rainey Collins office (0800 733 424)